Portfolio Updates – December 2020

For the month of December, the equity markets continued their advance, ending the year at or near all-time highs. The S&P 500 advanced 3.7% while the bond market was up 15%.

Our conservative, moderate and growth models were up over 2.5%, 3% and 3.5% respectively, in line with their benchmarks and adding to the gains for the year.

The trend from October and November carried over in December, where we observed a continued broadening of the market. What this means is that more companies are joining the rally, and the laggards from earlier in the year continued to outperform the leaders from earlier in the year. Small caps, mid-caps, financials, energy and consumer cyclicals (discretionary) outperformed mega cap and technology. This trend, in our opinion, is durable and will likely continue in the months ahead as the market prices in the eventual, yet gradual, reopening of our country.

Both the availability and start of administration of the Moderna and Pfizer COVID vaccines, as well as expectations of another round of direct payments to U.S. citizens were the primary drivers of the uptrend, in our opinion. Ample liquidity, the Fed’s commitment to lower rates for longer and additional spending bills under the Biden Administration were also contributing factors to the surge. Adding to the exuberance was talk about an infrastructure bill and expectations for earnings growth among economically sensitive areas of the market. Simply put, the market is pricing in expectations for better days ahead.

As we gradually began shifting money out of the top 50 largest U.S. companies via XLG in anticipation of additional market breadth, we continued to broaden our exposure to areas of the market beyond large cap technology and large growth. We started this process in October after observing relative weakness in the FAANG complex (Facebook, Amazon, Apple, Netflix, Google), and the trend has continued. This bodes well for additional gains in the upcoming year, as valuations of these more cyclical companies are not nearly as stretched as those large cap tech darlings. We believe this “catch up” trade will drive the market higher, though all segments of the market may not advance to the same degree.

During the final month of the year, we added exposure to mid-cap (IJH) and small cap (IJR) blend funds. As the middle of the year’s momentum stocks continued to wane, we rotated from our mid cap growth momentum fund (PDP) to a more pure mid cap growth play (FNY). We also moved deeper into large value territory with the introduction of VLUE after selling the quasi-value play fund OUSA.

These tactical changes, in addition to the prior months shift to S&P 500, equal weight (RPS), provides increased exposure to financials, industrials and consumer cyclical, which continue to exhibit greater strength relative to technology and large cap growth.  The result is much greater balance between growth and value/large and small, than we had prior to October, as the prior overconcentration in mega cap/tech served its purpose when the economic impact from COVID was very cloudy. As the market is now seeing brighter days ahead, the rotation beneath the surface should continue to favor areas beyond mega cap/tech.

As we close the books on what was one of the most challenging market environments in decades, we remain optimistic that the market can continue to grind higher through broader participation of companies that have lagged for the first three quarters of the year. We feel that this rotation will continue, as the economy continues its self-repair, and our country looks forward to the days we can get back to a more normal way of life. Add to this the likelihood of increased government spending programs, and additional injections of cash to people and business who need it most, our country should increase their spending as pent up demand from almost a year of lockdown will start to emerge.

This acceleration of demand, and thus spending, should keep the market afloat and moving up and to the right. While there will likely be pockets of volatility in the months ahead, we will remain focused on managing risk exposure and seeking out segments of the market that are showing greater strength relative to the broad market.

We wish you well as we enter the new year. Stay safe and healthy.